Key Components of California Greenhouse Gas Regulations

Greenhouse Gas (GHG) compliance is integral to the energy business in California, but for many aspiring Market Participants navigating these regulations can seem daunting. In today’s blog post, I will cover some of the key components you’ll need to understand to successfully navigate the California Independent System Operator (CAISO) Energy Imbalance Market (EIM):
Standard Operating Procedures
Standard Operating Procedures (SOPs) are enforced under the California GHG cap program and constitute part of the larger mission for not only CAISO, but also the Environmental Protection Agency (EPA), which is charged with regulating GHGs under the Clean Air Act.
The CAISO EIM rules allow Market Participants with resources outside California to include GHG Bid Adders to their EIM energy bids. All GHG Bid Adders are subject to the following regulations and SOPs:[1]

  • Imports of energy into California and generation of energy within California are subject to the California Cap on GHG Emissions.
  • For generation within an EIM Balancing Authority (BA), EIM Participating Resource Scheduling Coordinators can include the costs of their GHG regulation compliance obligation as an adder (cost element added to an initial cost estimate by a fixed amount or percentage) to their energy bids.
  • The sum of the EIM GHG Bid Adder and the energy cost portion of the bid cannot exceed $1,000 USD/MWh.
  • The GHG Bid Adder cannot be negative.
  • An EIM Participating Resource Scheduling Coordinator may submit no more than one Bid Adder per day for an EIM resource.
  • The CAISO will include the marginal EIM Bid Adder as a negative component in the Locational Marginal Prices (LMPs) for EIM Entity Balancing Authority Areas (BAAs).
  • Security constrained economic dispatch in the Real-Time Unit Commitment (RTUC) and Real-Time Dispatch (RTD) takes into account EIM Bid Adders when selecting power produced by an EIM resource that is outside the CAISO BAA but then imported into the CAISO BAA or other EIM Entity BAAs in California. It does not when selecting EIM resources to serve load outside of the CAISO BAA or other EIM Entity BAAs in California.
  • EIM Participating Resource Scheduling Coordinators are notified of their GHG obligations including the quantity of imports into the CAISO BAA or other EIM Entity BAAs in California as a result of the Market Clearing of the Real-Time Market (RTM).
  • EIM Participating Resource Scheduling Coordinator will be compensated for imports into its areas of operation at the marginal EIM Bid Adder price.
  • EIM Participating Resource Scheduling Coordinator will receive reports that show portions of the Fifteen Minute Market (FMM) energy schedule and RTD that is associated with imports to the CAISO BAA or other EIM Entity BAAs in California from all EIM Resources as part of the RTM.

A more comprehensive look at SOPs can also be found in OATI’s recent e-book Navigating the CAISO-EIM Standard Operating Procedures.
Air Resources Board Provisions
For those participating in the CAISO EIM, an understanding and adherence to the various provisions surrounding the use of “allowances” issued by the Air Resources Board is critical to successful participation in the market. As soon as prospective Market Participants become participating entities, they will be issued allowances by the Air Resource Board and/or will procure them at periodic auctions organized for this purpose. Each of these allowances gives a participating entity the right to emit a metric ton of carbon dioxide (CO2).
Compliance Costs
GHG compliance is an operating expense that Market Participants have to deal with and account for. Generally, an EIM Participating Resource can recover costs of GHG compliance by seeking the deferment of allowance costs, which are costs associated with GHG compliance when there is uncertainty with final resource specific emission factor (since resources cover gasses other than CO2).
Locational Marginal Prices
LMPs are used to settle with participating resources dispatched in EIM. As a general rule, the LMPs in Independent System Operator (ISO)/Regional Transmission Operator (RTO) markets have three additive components, namely: a system marginal energy price component, a congestion component, and a marginal loss component. In the EIM, the LMPs in EIM BAAs outside California have a fourth component – the GHG component. This component comes into play only when the EIM Participating Resource outside California is dispatched in the EIM to export into California. In an EIM BAA, LMPs used for EIM dispatch serving imbalances in the BAA are not affected by GHG compliance costs, because, by virtue of the market design, marginal cost differences between EIM resources serving load in and out of CAISO are calculated and determined by the market optimization process.
Navigating GHG regulations can seem daunting for many aspiring Market Participants. The good news is that advanced software solutions—like OATI’s CAISO EIM software—are built to optimize day-to-day operations by automating SOPs and GHG regulatory compliance, while also providing Market Participants with the tools needed to succeed in the EIM place.
About the Author:
Dr. Farrokh Rahimi is Senior Vice President, Market Design and Consulting at OATI. He has more than 40 years’ experience in the electric power industry. Dr. Rahimi is also a key contributor to OATI Smart Grid activities. He is an expert in restructured energy market design and related systems, including operations, commercial and business systems, and market monitoring applications. He holds many awards and honors and has published extensively in industry journals. Dr. Rahimi has an intimate knowledge of California ISO where he did pioneering work in the development and design of the CAISO Market Redesign and Technology Update (MRTU) market. Dr. Rahimi was also a Project Manager and key contributor for the development of Functional Specifications for the CAISO and Power Exchange (CalPX) Business Systems, including Bidding, Scheduling, Settlement, and Billing Systems. He was CAISO’s expert witness in front of Federal Energy Regulatory Commission (FERC) for CAISO’s MRTU design. Dr. Rahimi’s other experiences include Macro Corporation (subsequently KEMA Consulting), Systems-Europe, and many years as a professor of Electrical Engineering and researcher in areas of electric power system analysis, planning, operations, control, and communication systems. Dr. Rahimi holds a doctorate in Electrical Engineering from MIT. He is frequently invited to speak at national and international events on various topics related to Energy Markets and the changing electricity paradigm, including Smart Grid, Distribution System Operations (DSO)/Distribution System Platform (DSP) construct, and Transactive Energy.

[1]SOPs are summed up from CAISO documents like Energy Imbalance Market – Final Tariff Language, February 28, 2014 and FERC Order 147 of June 19, 2014.